WASHINGTON – The securities fraud jury verdict against the city of Miami and its former budget director Michael Boudreaux on Wednesday will likely embolden the Securities and Exchange Commission to litigate rather than settle cases against issuers and their officials, lawyers said on Thursday.
The case before the U.S. District Court for the Southern District of Florida in Miami centered on SEC charges that Miami and Boudreaux were guilty of fraud because of their role in omissions and misrepresentations made in offering documents for three 2009 bond offerings, presentations to rating agencies, and annual financial reports. The omissions and misrepresentations were made in connection with inter-fund transfers to boost Miami's ailing general fund, according to the SEC.
The lawsuit was the SEC's first federal jury trial against a municipality or one of its officers for violations of securities laws.
One lawyer in the industry who requested anonymity said that the SEC will likely take advantage of the verdict by widely publicizing it.
"I think they'll make sure that the issuer world pays attention to it," the lawyer said.
Robert Doty, president of the municipal securities litigation consulting firm AGFS, agreed that the commission might now be bolder about pursuing litigation instead of settling, which he said is significant because the SEC has been litigating more recently than it did in the past.
"I do think the commission took a bit of a calculated risk," Doty said, noting that litigation always comes with some risk. "It was a risk and they won big, they won really big."
Andrew Ceresney, the SEC's director of enforcement, said in a statement following the verdict that the SEC "will continue to hold municipalities and their officers accountable, including through trials, if they engage in financial fraud or other conduct that violates the federal securities laws."
Boudreaux's lawyer, Benedict Kuehne, told media outlets present after the verdict was announced that he intended to appeal the case.
Mitchell Herr, a partner with Holland & Knight in Miami and former SEC lawyer involved in an earlier SEC case against Miami, said that one area of the case that Kuehne would likely review when deciding to appeal is a discrepancy in the jury's findings made clear in the published jury report.
The jury found that Boudreaux did not use a "device, scheme, or artifice to defraud" in connection with the offer or sale of securities under Section 17(a)(1) of the Securities Act of 1933, but it did find he used a "device, scheme, or artifice to defraud" in connection with the purchase or sale of securities as part of Section 10b-5 of the Securities and Exchange Act of 1934.
"Because these findings are potentially inconsistent, I would expect Boudreaux's counsel to thoroughly investigate whether this potential inconsistency is a basis for appeal," Herr said. An important factor in the possibility of an appeal on that point will be whether Kuehne raised the issue and tried to get it fixed before the jury was excused.
Aside from that discrepancy, the jury found that both Miami and Boudreaux were guilty on all remaining counts, which included aiding and abetting charges against Boudreaux.
One other important consideration in the case, according to Doty, was the jury's conclusion that neither Miami nor Boudreaux met the standards to justify their defense that they relied on auditors when making the decisions tied to the alleged fraud and misrepresentations.
The jury found that they did not meet the four factors necessary for that defense. They did not: completely disclose the facts about the conduct at issue to the auditors; seek advice from the auditors about their specific course of action; receive advice from the auditors abut that course of action; or rely on and follow the advice in good faith.
"I think what the verdict does is it provides a roadmap [on] how issuers and issuer officials [can] establish justifiable reliance on professionals," Doty said, emphasizing the need to meet the four factors. "Somehow people need to understand what it takes to have justifiable reliance on professionals. It is not enough for the professional to just be involved in the transaction. That just doesn't get the job done."
The SEC will now have to file a motion by Sept. 28 seeking specific sanctions, which are expected to include an injunction barring Miami and Boudreaux from future securities law violations and financial penalties. The SEC has also asked the judge for an order that would command Miami to comply with a prior cease-and-desist order from 2003 that resulted from an earlier securities fraud case.
Ceresney said that the SEC expects the judge to find that Miami violated that previous order.
